I think one innovative idea out there is to create “baby bonds” for newborns. I read about this concept in the Sunday Times, and I have always been a huge fan of the general concept of investing money as soon as a kid is born. It can be a great tool to help build wealth and savings for future generations, encourage financial literacy, form a quasi-retirement account, and there are many other advantages to the concept.
What is a baby bond, or more importantly what is the concept all about? It is a proposal being pushed by presidential candidate Cory Booker. Now while it is just a proposal, and the goal of this post is to not go over every single details of his proposal (as we are sure the details will change over time as well), what the general concept involves is to create a savings account for a newborn baby and the federal government funds it.
His proposal involves funding the account with $1000 at first, then the government adds more money each and every year. Kids in low income households will have more added annually and a kid in a higher income household will have less money added annually if any. The baby bond proposal may involve adding $1000 or $2000 per year (based on household income). But kids from higher income households may not have any money added to the account.
The baby bonds will have the money invested for the kids in lower risk investments…probably Treasury bonds or some other debt instrument. This will help ensure the money is not lost in the stock market. However I for one would like to see some (or large percentage or all) of it invested in stocks as a baby has time for their money to grow.
Then, in the baby bond proposal, when the kids turns 18, they can collect the cash – redeem the baby bonds. There are restrictions on what the money can be used for, and the funds will only be for certain “wealth” increasing costs such as paying for college, starting a business, or buying a home.
Benefits of the concept of baby bonds
I personally love this concept! While I will not speak to baby bonds by themselves, I think the concept of opening an investment accounts for newly born babies is awesome! While I do not have kids, I have talked to a few other parents about this in the past and have encouraged it with others. We even have data on opening savings accounts for kids. There are many reasons why, and I will tough on a few of them below.
The first, and maybe most important pro of the concept, is the time for the money to grow and compound. If you give a baby $1000 the moment they are born, and never add another cent to it, the “kid” will have about $88,000 to their name (if it grows by 8% per year) by the time they are 59. This is due to the magic of compounding. Heck, $88,000 is more than most adults will ever have for retirement as multiple surveys show. And the cost for the baby to have that $88,000? It is just one $1000 when they are born.
Now if you gibe newborn $1000 when they are ages 1 to 5 (so $5000 total), they will have about $375,000 by the time they are 59. Incredible! A cost of $5000 for a newborn (call it baby bond or whatever you want) could almost solve the retirement crisis in this country!
Second is it should help build financial literacy. As we have noted multiple times, the general financial knowledge of Americans is terrible. Survey after survey shows most people fail basic tests when it comes to very basic concepts. If a baby has money to their name, as they age as kids and into adulthood, it can’t but help encourage them to learn about investing, debt, saving money, living within means, and so much more.
Third, if a baby bond or some other investment vehicle has some form of restriction of what the money can be used for, that will also help build wealth. For example, do not allow a baby bond (or this investment) to be used to buy “material goods” such as cars, electronics, clothes, or other foolish stuff. Make the funds limited to those wealth building assets, such as real estate, business, dividend paying stocks, education, or some other asset that can even build passive income.
This is not a political blog and we do not push or recommend one political party or another. Though we do talk about such topics relevant to both parties such as income inequality, income tax rates, and more. So, while we would never talk to specifically about baby bonds (and of course the exact details of Bookers proposal are bound to change), we are a huge fan of opening investments accounts for newborns and kids in general.
Financial literacy, investing, and money management is such a critical skill in today’s word, and parents and schools (and others) do a horrible job in teaching it. Baby bonds (or a similar concept) can help address this critical need.